Bond prices have experienced volatility in recent years due to the Federal Reserve’s efforts to counter high inflation by raising interest rates. However, as the possibility of further rate hikes diminishes, investors might find opportunities in attractive yields offered by short-term bonds.

Here’s a guide to understanding short-term bond funds and a selection of top options to consider for your portfolio.

Short-term bond funds encompass mutual funds and exchange-traded funds (ETFs) that predominantly invest in government and corporate bonds maturing in less than five years. These bonds are less susceptible to interest rate changes compared to longer-term bonds, offering investors a measure of stability if rates increase. It’s crucial to note that bond prices move inversely to interest rates: as rates rise, bond prices generally decline, and vice versa.

Investors in short-term bond funds earn yields, reflecting the income generated by the bonds held in the portfolio relative to their current market value.

Short-term bond funds are ideal for various investors, especially those saving for short-term goals. Investing money earmarked for use within the next three to five years in short-term bonds allows for earning a reasonable return without excessive risk.

Before investing, it’s crucial to scrutinize a fund’s expense ratio, which represents its fees. Generally, lower expense ratios are preferable, as they contribute to better overall returns for investors.

The SPDR Portfolio Short-Term Corporate Bond ETF strives to mirror the Bloomberg U.S. 1-3 Year Corporate Bond Index’s performance. It provides investment in U.S. corporate bonds with maturities ranging from one to three years.

  • SEC Yield: 5.32 percent
  • Expense Ratio: 0.04 percent
  • Assets Under Management (AUM): $7.6 billion

The iShares fund seeks to replicate the performance of an investment-grade corporate bond index comprising bonds with maturities between one and five years. Its portfolio includes bonds issued by major entities such as Bank of America, JPMorgan Chase, and Microsoft.

  • SEC Yield: 5.29 percent
  • Expense Ratio: 0.04 percent
  • Assets Under Management (AUM): $20.3 billion

The Schwab 1-5 Year Corporate Bond ETF aims to replicate the total return of an index that tracks the performance of the short-term U.S. corporate bond market. The fund primarily invests in corporate bonds with remaining maturities ranging from one to five years.

  • SEC Yield: 5.25 percent
  • Expense Ratio: 0.03 percent
  • Assets Under Management (AUM): $403.4 million

The Vanguard Short-Term Bond ETF seeks to replicate the performance of a market-weighted bond index comprising investment-grade bonds with a dollar-weighted average maturity ranging from 1 to 5 years. The fund’s portfolio includes government bonds, high-quality corporate bonds, and investment-grade international dollar-denominated bonds.

  • SEC Yield: 4.83 percent
  • Expense Ratio: 0.04 percent
  • Assets Under Management (AUM): $32.3 billion

Fidelity Short-Term Bond Fund (FSHBX)

The primary goal of the Fidelity Short-Term Bond Fund is to generate substantial current income while safeguarding capital. It typically allocates a minimum of 80 percent of its assets to various forms of investment-grade debt and manages a dollar-weighted average maturity of three years or less.

  • SEC Yield: 4.96 percent
  • Expense Ratio: 0.30 percent
  • Assets Under Management (AUM): $2.3 billion

Short-term bond funds offer a suitable option for investing funds needed in the near future. While they provide potential yields, it’s essential to note they carry risks, albeit less than high-yield bonds or stocks. For investors seeking even lower risk and stable yields, money-market funds may be a preferable alternative.